Boards Beware: Accountability is Rising

Douglas Chia is Founder and President of Soundboard Governance LLC and a Fellow at the Rutgers Center for Corporate Law and Governance, and Lex Suvanto is Global Managing Director of Financial Communications at Edelman. This post is based on their Edelman memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Boards are facing new expectations and accountability as stakeholder capitalism gains steam. One year following the release of the Statement on the Purpose of a Corporation by the Business Roundtable, a live debate continues over the purpose of the corporation and to whom the board is accountable. The fact that 181 prominent CEOs signed a statement that shifted the way boards and CEOs view their accountability is clear evidence that a diverse set of stakeholders have indeed attained leverage on corporations to live up to their expectations. Amidst the COVID-19 pandemic and resulting economic recession, employees and communities are increasingly looking to boards and CEOs to consider their needs for a strong recovery. Boards are likewise increasingly expected by shareholders to ensure their companies are taking action to address climate change.

Board Accountability: The Legal Perspective

While jurists, academics, and lawyers actively debate to whom the law “says” boards and CEOs have a duty—be it the shareholders, a mix of stakeholders, the corporation itself, or some combination thereof—one thing that is clear is that in the eyes of the law, the standard of fulfilling those duties is extremely low. The “business judgment rule” is very forgiving of corporate directors and officers for making lousy business decisions, so long as they can show evidence that those decisions were duly considered. And the process for considering those decisions may also be far from perfect.

Many critics view the business judgment rule as the ultimate shield from accountability to shareholders and stakeholders alike and point to the fact that no board member of any large financial services institution was found to have breached their fiduciary duties when prosecutors and courts examined the financial crisis of 2008.

It wasn’t even until 2005 when WorldCom entered into what was then the largest bankruptcy in history (since surpassed only by Lehman Brothers and Washington Mutual) for corporate directors to agree to personally pay their own money for a corporate failure. Still, even after the passage of the Sarbanes-Oxley and Dodd-Frank Acts, WorldCom did not become a precedent for future instances of board accountability.

A few recent cases, however, suggest that courts may be starting to raise the minimum standards for a board to fulfill its duties. Delaware courts—through decisions involving Blue Bell Creameries and Clovis Oncology—have sent boards the message that they will be expected to take a more proactive approach to their risk oversight duties, which will involve affirmatively demanding more information from management instead of just consuming what management feeds them.

Board Accountability: Investor Activists

The most effective agents of board accountability in the last two decades have been activist hedge funds. These investors have made aggressive efforts to influence corporate governance and hold boards accountable for their actions, whether through exercising their legal rights as shareholders or public pressure campaigns. It’s now commonplace for boards to face the ultimate form of accountability when directors are voted out and replaced by board candidates hand-selected by activists hedge funds. In fact, in 2019 activists gained 231 board seats through both settlements and contested elections. Pension funds for public employees, organized labor, and religious organizations have also upped the pressure on the boards of public companies with some success. Sometimes this has been through a collective, issue-specific effort, such as holding companies in the health care industry accountable for their role in the opioid crisis.

Board Accountability: Passive Investors

A more significant development impacting board accountability has been the accumulation of equity capital by a small number of “passive” asset managers to the point where three large institutions—BlackRock, State Street, and The Vanguard Group—together own about 20% of the typical S&P 500 company. [1] These firms now have far greater sway over boards than even the largest activist hedge funds and public pension funds. And, while these large asset managers may primarily deploy “passive” investing strategies, the methods they use to hold boards accountable have become less passive and more public. These firms have been publicly explicit about their expectations of boards on a range of issues, with an increasing focus on ESG topics, including diversity and inclusion initiatives and strategies to manage climate change risks.

BlackRock, State Street, and Vanguard have also raised expectations for boards to shift focus from shareholders to stakeholders. In his January 2018 letter to CEOs, Blackrock CEO Larry Fink wrote, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” The chairs of State Street and Vanguard issued similar statements. When the leaders of the world’s largest investors tell boards that it’s not all about investment returns, boards start to listen. (Fink’s subsequent annual letters have gone even further to admonish boards and CEOs to demonstrate stronger leadership on societal issues and climate change.)

Board Accountability: Employees

Employees are themselves taking action to express their discontent to boards and attempt to pressure them into action. During the 2019 proxy season, Alphabet employees submitted three proposals at the company’s annual meeting, regarding human rights in China around Google’s proposed censored search app, mandatory arbitration and the use of nondisclosure agreements in sexual harassment claims, and tying executive pay to environmental sustainability and racial and gender diversity. At Amazon, a group of employee shareholders filed a resolution at the company’s annual meeting to pressure top executives into reducing contributions to climate change. In addition, more than 5,200 employees signed an open letter calling on CEO Jeff Bezos and the board to support the resolution. There is solid evidence that millennials believe that it’s right for employees to speak up against their employers, even in the face of potentially losing their jobs, much more than previous generations, [2] and this could continue to build.

Board Accountability: Politicians and Regulators

Politicians and regulators are setting new precedent in holding boards accountable—directly meddling in the composition of corporate boards that they do not believe are doing a good job. In the wake of the Wells Fargo fake accounts scandal, Sen. Elizabeth Warren called on the Federal Reserve to remove Wells Fargo board members who presided over the bank when it opened millions of consumer accounts without customers’ authorization. The Federal Reserve subsequently imposed an unprecedented enforcement action against Wells Fargo, after which the company removed four of its board members. Sen. Warren later introduced a bill entitled the Accountable Capitalism Act, proposing that corporate boards have to be more accountable to the full range of stakeholders, not just shareholders. The Securities and Exchange Commission has separately instituted rules to enhance the information companies must provide to shareholders so they are better able to evaluate board accountability. And state legislatures—most notably California—have recently passed or are considering new laws to force the issue of diversifying boards to add women and members of racial and ethnic minority groups.

Board Accountability: Media

The media has long seen itself as a watch dog for corporations but is increasingly zeroing in on boards for insufficient oversight, poor judgment or poor decision-making surrounding a variety of issues involving fraud, harassment, discrimination, faulty products, and other corporate misdeeds. This scrutiny has intensified during the pandemic, with media paying close attention to which companies are supporting the needs of their employees and communities during this difficult time. In some cases, this media attention has ultimately led to board members stepping down or being removed.

Board Accountability: ESG

As attention on climate risk and ESG continues to grow, boards will increasingly be held accountable for corporate commitments to these areas. Shareholder proposals focused on climate risk were the second most commonly filed in the U.S. in 2020. [3] In Canada, corporate directors are said to have a legal obligation to address the risks and opportunities that climate change poses to the companies on whose boards they serve. Large investors such as Blackrock are explicitly stating that they expect boards to maintain oversight of ESG issues and ensure the company is making progress. Similarly, proxy advisors ISS and Glass Lewis are getting behind these issues, which will put further pressure on boards to act.

More recently, we have seen cases of hedge fund activists using their muscle to insist that boards play a key role in “assuring investors that their company’s ESG and stakeholder policies and metrics are well-suited to driving the sustainable long-term growth in company value that investors are seeking.” That was in the words of veteran activist investor Jeff Ubben, who left ValueAct Capital earlier this year to launch a billion-dollar fund to invest in firms that advance “inclusive capitalism.”


Amidst increasing pressure on boards from all angles, we offer a few recommendations.

  • Listen—Actively. Boards must gather intelligence from stakeholders beyond just investors. Shareholders can no longer be the sole priority. Does the board have a clear sense of employee sentiment, the health of the company’s culture and the potential for employee activism? Does the board understand potential vulnerabilities the company faces from a social justice point of view? These questions must be built into the modern board playbook.
  • Expand the Board Toolkit. Boards must ensure they have the tools they need to succeed in the coming era of stakeholder capitalism. This includes appointing a CEO that is forward-thinking and forward-leaning on a full range of stakeholder concerns and how to address them in a constructive manner that builds value. This also includes refreshing the board’s capabilities and structure to ensure it can effectively steward the company through emerging issues such as DE&I and climate change.
  • Ensure Management is Equipped. Boards must determine whether their management leaders (CHRO, CIO, CISO, communications, government affairs, supply chain) are cognizant of and equipped for emerging demands posed by stakeholder capitalism and bring them into the circle on governance discussions to ensure boards have the information they need for effective oversight and action.
  • Act, with Urgency. Simply put, boards must see the future and act, starting now, to steward their companies in the right direction, driven by the right strategy and purpose. Notably, this may entail less deference to the CEO.

In an environment where all corporate stakeholders are more emboldened to act, boards are facing a new degree of expectations and accountability. Pressure points that were already visible prior to the pandemic have only accelerated because the stakes are intensifying. The conventional and conservative tendencies of boards to play it safe are now outdated and can easily be exposed, tarnishing reputations, creating legal liability, or destroying value. Boards must understand the expectations of all stakeholders and be proactive about ensuring their companies meet those expectations, or risk being replaced.


1McLaughlin, David and Massa, Annie, “The Hidden Dangers of the Great Index Fund Takeover,” Bloomberg Businessweek, January 9, 2020.(go back)

2Colvin, Geoff, “The activist employee hasn’t gone away,” Fortune, September 21, 2020.(go back)

3Gibson, Dunn & Crutcher LLP, “Shareholder Proposal Developments During the 2020 Proxy Season,” August 4, 2020.(go back)

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